Tied Aid Credits and the New Oecd Agreement

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Tied Aid Credits and the New Oecd Agreement TIED AID CREDITS AND THE NEW OECD AGREEMENT KATHERINE P. ROSEFSKY* 1. INTRODUCTION Wealthy governments frequently "tie" their foreign aid by linking official support for developing nations to the procurement of goods and services from the donor nation.' Sometimes the use of tied aid is "intended to supplement the working of the market.. [by enabling] trade to take place when and where it does not attract commercial financing.... 2 More often, aid- tying is intended to benefit national exporters. For example, *J.D. Candidate, 1994, University of Pennsylvania Law School; BA., 1989, Princeton University. I wish to thank Robert Lee, Bernard Lubrin, Eric Liu, Peggy Houlihan, Ernest Preeg, Edith Boehler, and Frank Record. They were all invaluable resources whose support was integral to this Comment. 1 INT'L TRADE ADMIN., U.S. DEPIT OF COMMERCE, INT'L FINANCING PROGRAMS AND U.S. INT'L ECONOMIC COMPETITIVENESS 5 (1990) [hereinafter INT'L FINANCING]. Technically, "Tied Aid is concessional financing linked to procurement of goods and services in the donor country. Tied Aid credits can either stand alone orbe mixed with commercial financing or standard official export credits. The latter are called mixed credits." Reauthorizationof the Export-Import Bank 1992: HearingBefore the Subcomm. on Int'l Financeand MonetaryPolicy of the Senate Comm. on Banking, Housing, and UrbanAffairs, 102d Cong., 2d Sess. 53 (1992) [hereinafter Senate Banking Hearing](statement of William E. Barreda, Deputy Asst. Secretary for Trade and Investment Policy, U.S. Dep't of the Treasury). The most recent example of a U.S. tied aid credit offer involved a $13 million sale of an air traffic control system to Tunisia. In response to stiff competition from France, the Export-Import Bank of the United States ("Eximbank") approved tied aid support that enabled Westinghouse Electric Corporation to win the Tunisian contract. The resulting Eximbank mixed credit package consisted of a 40% grant element ($5 million) and a 60% direct loan ($7.9 million). See EXPORT-IMPORT BANK OF THE UNITED STATES, REPORT TO THE CONGRESS UNDER SECTION 15(G) OF THE EXPORT-IMPORT BANK ACT OF 1945, AS AMENDED (Section 19 of the Export-Import Bank Act of 1986, Pub. L. No. 99-472) 7 (June 18, 1992); Exim Approves Mixed Creditfor Sale of U.S. Goods, Services To Tunisia, 9 Intl Trade Rep. (BNA) 1487, 1495 (Aug. 26, 1992); see also EXPORT-IMPORT BANK OF THE UNITED STATES, REPORT TO CONGRESS UNDER SECTION 15(G) OF THE EXPORT-IMPORT BANK ACT OF 1945, AS AMENDED 12 (Apr. 26, 1993) [hereinafter 1993 EXPORT-IMPORT BANK REPORT]. 2 John E. Ray, COMMERCIAL VIABILITY IN THE HELSINKI PACKAGE, SECRETARIAT OF THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT 2 (Dec. 18, 1991). For example, a developing nation may be unable to obtain project financing either because the project is unattractive to commercial lenders or because a market imperfection exists. Id. Published by Penn Law: Legal Scholarship Repository, 2014(437), U. Pa. J. Int'l Bus. L. [Vol. 14:3 by tying its aid, the donor nation may help a domestic exporter win a contract from a developing nation that would otherwise go to a foreign competitor.' Such practices, however, interfere 4 with the normal functioning of the market. Often, major industrialized nations attempt to design foreign aid packages to benefit the recipient nations while stimulating their own economies, a practice which causes market imperfec- tions. The United States, however, has traditionally focused most of its foreign assistance on helping developing nations meet basic human needs. As a result, U.S. businesses have lost global market share not because their goods are of lower quality or are overpriced, but because foreign businesses benefit from their governments' export promotion policies.' As a practical matter, commercially-motivated tied aid practices by other industrialized nations shut U.S. exporters out of a $10 to $12 billion market in capital goods transactions, leading to an annual loss in U.S. exports of $2.4 to $4.8 billion.' 3 Export-Import Bank Report to Congress On Tied Aid Credit Practices: HearingBefore the Subcomm. on Int'l Economic Policy and Trade of the House Comm. on ForeignAffairs, 101st Cong., 1st Sess. 1 (1989) [hereinafter 1989 Eximbank Hearing] (statement of Rep. Sam Gejdenson, Chairman). For example, in 1986, an American company lost an $8 million contract to install a cellular communications system in China to a Swedish company because the Swedish government offered a substantial amount of grant assistance linked to its company receiving the contract. The $8 million initial contract had an estimated $80 million of follow-on business through 1995, reflecting an even greater loss for the U.S. company. Id. " See Ray, supra note 2, at 2. Ray discusses the concept of"additionality," which suggests that government supported funds (i.e., non-commercial financing) should be in additionto commercial financing. "To minimize trade distortion, non-commercial financing should increase flows of resources," not replace commercial financing. Id. (emphasis in original). See also INT'L FINANCING, supra note 1, at 35. 'See Andrew M. Moravcsik, DiscipliningTrade Finance: The OECD Export Credit Arrangement, 43 INT'L ORG. 173 (1989). 6 ERNEST H. PREEG, CENTER FOR STRATEGIC AND INTL STUDIES, THE TIED AID CREDIT ISSUE: U.S. EXPORT COMPETITIVENESS IN DEVELOPING COUNTRIES 6 (1989) [hereinafter PREEG CSIS STUDY]. This study of tied aid credits was undertaken after Eximbank reported to Congress on the issue in 1989. Ambassador Preeg criticized the Eximbank report for its gross underestimation of the damage that other nations' use of tied aid credits does to the U.S. economy. Eximbank had reported that U.S. exporters are shut out of a $4 to $6 billion marketin capital goods, resultingin an annual sales loss of $400 to $800 million. 1989 Eximbank Hearing,supra note 3, at 14-15 (statement of William F. Ryan, Acting President and Chairman, Export-Import Bank ofhttps://scholarship.law.upenn.edu/jil/vol14/iss3/5 the United States). Preeg's figures have generally been accepted in lieu 19931 TIED AID CREDITS Members of both Congress and the business community have strongly urged the U.S. government to utilize tied aid credit practices and to increase general support for capital projects financing. In both of these areas, the United States has lagged far behind other industrialized nations." Such a policy would enable U.S. exporters to regain lost global market share, which in turn would strengthen the U.S. domestic economy by creating more jobs in the United States.' Moreover, as economic strength supersedes military strength as a key indicator of a nation's international status, this policy would ensure that the United States maintains its leadership role in international affairs. This Comment examines the practice of aid-tying, the history of U.S. tied aid policy, the current international agreement covering tied aid credit practices, and congressional and domestic business dissatisfaction with current U.S. policy. Section 2 of this Comment describes the aid-tying process and explores the problems created by the use of tied aid credits and mixed credits.' Section 3 reviews the history of the U.S. government's efforts to reduce the use of tied aid credits through negotiations within the Organization for Economic Cooperation and Development of Eximbank's conclusions. Congress sharply criticized the 1989 Eximbank Report for its failure to make recommendations. Id. at 19. The Bush Administration subsequently offered suggestions in a letter to the Speaker of the House and the President of the Senate. Letter from Nicholas F. Brady, Secretary of the Treasury, and John D. Macomber, President and Chairman ofEximbank, to Thomas S. Foley, Speaker of the House of Representatives (Sept. 11, 1989), reprintedin PREEG CSIS STUDY, supra, at Appendix B. ' Capital projects financing is particularly susceptible to tied aid credit practices. Moreover, capital projects financing is attractive to donor nation governments because it enables them to expand exports, to penetrate markets, to establish standards that induce follow-on exports, and to support domestic industrial policy goals. See INT'L FINANCING, supra note 1, at 36. The 1989 Eximbank report estimated that the 83% of Organization for Economic Cooperation and Development notifications of tied aid credit offers were in the five major capital infrastructure sectors of computer equipment, earthmoving equipment, electric power generating equipment, rail transportation equipment, and telecommunications. 1989 Eximbank Hearing, supra note 3, at 10 (statement of William F. Ryan). In 1988, the United States spent 14.3% of its bilateral aid on capital projects. By contrast, France spent 27.7%; Germany, 46%; Japan, 60.7%; the United Kingdom, 41.8%; Canada, 30.2%; and Italy, 61.2%. INT'L FINANCING, supra note 1, at 38. ' See infra note 35. * This Comment will use the terms "tied aid credits" and mixed credits" interchangeably. Published by Penn Law: Legal Scholarship Repository, 2014 U. Pa. J. Int'l Bus. L. [Vol. 14:3 ("OECD").10 Section 3 also includes with an explanation of the Helsinki Package, which is the most recent OECD agreement covering tied aid credits, and the general Bush and Clinton Administration reactions to the Helsinki Package. Section 4 surveys Congressional responses, particularly legislative initiatives, to the problems created by tied aid and to the possibility of expanded U.S. participation in the international capital projects market. Section 5 examines the positions of the U.S. business community on tied aid credits and on the Helsinki Package. This Comment then concludes that the U.S. government should bring its foreign aid policy more in line with the aid policies of other industrialized nations either through the aggressive use of tied aid credits or through increased funding for capital projects which result in substantial domestic economic benefit.
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